Market Failure

Where the free market fails to allocate resources in the best interests of society as a whole.

Where land, labour and capital are not used as efficiently as possible.

When externalities exist within a market

Costs and/or benefits to people not included in the consumption of goods/services.

A cost to third parties. These are known as external costs.

A benefit to third parties. These are known as external benefits.

The costs and benefits of a firm/individual that produces/consumes the good or service.

The costs/benefits to a third party, who are not involved in the consumption of the good/service.

The costs and benefits that arise for the whole of society

Yes

The adverse consequences to third parties arising from the manufacturing of a good or service

The adverse consequences to third parties arising from the purchase or use of a good or service e.g. road congestion

Yes

Where governments intervene to correct a market failure.

Taxes on the consumption of goods e.g. value added tax (VAT).

Higher prices reduce consumption, internalise the externality (producer pays), raise money to tackle the externality

Depends on PED, how much tax should be added, could cause unemployment, will it affect those on lower incomes more

Laws to control the way people and organisations behave

Rules, directives or government orders to control the way people and organisations behave.

The government decides how much consumption is desirable, can be legally enforced, could change attitudes in the long run

Cost of enforcement (police), how much is necessary, could lead to an unofficial market

Government can stop consumption entirely, can legally enforced

Will require effective policing, might promote illegal activity

The government provides information to consumers about goods and services.

Reduces consumption, no cost to consumer or firm

Could be ignored, message might not be effective, might not work for addictive goods, cost to the government

A payment to a firm from the government to promote the supply and consumption of socially desirable goods.

Increases production of good with positive externality, reduces inequalities of income

Requires taxpayer's money, opportunity cost, may not lead to increased usage, could lead to over-reliance and inefficiency

Increases consumption, long-lasting impact

Could be ignored, the message might not be effective

Goods and services are provided directly by the government.

Increased consumption of the good, benefits the entire country, government can decide how much to provide

Can be very expensive (opportunity cost), how much should be provided, lead to inefficiencies, pressure on government to spend more

Indirect taxes, legislation & regulation, prohibition, information provision

Subsidies, information provision, state provision